Chemical giant The Dow Chemical Company (DOW) earned 54 cents per share in the third quarter of 2010, ahead of the Zacks Consensus Estimate of 41 cents as well as last year’s 24 cents. However, including one-time charges, the company earned 45 cents, down 29% from 63 cents in the year-ago quarter.

Quarterly revenues jumped 23% year over year to $12.9 billion and were in line with the Zacks Consensus Estimate of $12.9 billion. Volume (14%) and pricing (8%) gains across all business segments and geographical regions, particularly North America and Latin America yielded healthy revenue growth.

North American revenues grew 27% while that of Latin America shot up 24%. Demand grew 16% in Europe, Middle East and Africa, and 15% in North America. Latin American volumes were up 11% on stronger demand in the Health and Agricultural Sciences segment. Volume in Asia Pacific increased 8%, led by gains in Electronic and Specialty Materials. Prices improved 13% in Latin America and 12% in North America.

A stronger top line growth led to over 20% increase in EBITDA (adjusted) to more than $1.9 billion. EBITDA margin was 15%, up 2%year-over-year. Dow’s global operating rate was 86%, up 8% year-over-year and up 6% sequentially.

Segment Review

Electronic and Specialty Materials:Sales in the segment climbed 12% year over year to $1.4 billion on a 13% rise in volumes offset by a 1% fall in prices. The Electronic business saw higher volumes, particularly in the Asia-Pacific region, where volumes grew by 30%.

Dow’s Semiconductor Technologies along with Display Technologies and Growth Technologies delivered strong growth, driven by higher end-market demand for televisions and computer monitors. Sales volumes in the business grew 50%.

Sales in the Specialty Material business were helped by double-digit growth in volumes (30%), especially in Asia-Pacific and Latin America. Earnings increased 5% to $426 million from last year’s $407 million.

Coatings and Infrastructure: Sales of $1.3 billion grew 16% year over year, primarily driven by pricing gains. Prices improved 10% while sales volumes inched up 1%. The coatings business benefited from higher sales of architectural and industrial coatings. The weak demand from construction markets in the Architectural coatings business were offset by higher volumes in the Asia-Pacific region.

The infrastructure business also recorded a double-digit sales improvement, driven by volume gains despite continued weakness in residential and commercial construction end-markets. EBITDA of $225 million was higher than $213 million in the same period last year.

Health and Agricultural Sciences: This segment’s sales moved up 19% to $948 million in the third quarter, with volume gains of 26%. Revenues in the segment are benefiting from product innovations such as pyroxsulam cereal herbicide in Northern Europe and the United States, and penoxsulam rice herbicide in Asia.

Higher demand for corn herbicides further added to higher revenues. Prices, however, declined 7%. Lower prices resulted in an operating loss of $12 million in contrast to profits of $5 million in the third quarter of 2009.

Performance Systems: Sales in this segment shot up 16% to $1.6 billion, as volume increased 12% and prices surged 4%. A strong rebound in the automotive market led to higher sales in the automotive systems business in North America and Asia-Pacific.

Dow saw higher sales of polyurethane glass bonding adhesives and foams as well as higher demand for technology-differentiated products used in acoustics and body structure applications. Modest price increases led to EBDITA of $225 million, up $207 million.

Performance Products: Sales soared 25% to $2.6 billion, primarily on the basis of higher prices. Prices rose 15% while volumes were up 10%. Polyurethanes business remained strong with higher pricing. Strong demand in electrical laminates in Asia-Pacific helped higher sales in the Epoxy business. Sales volumes in the business grew 30%.

Polyglycols, Surfactants and Fluids demand remained high across all regions. Adjusted EBITDA for the segment was $429 million, up 44% from $298 million (adjusted for a one time gain of $140 million) in the year-ago quarter.

Basic Plastics: Basic Plastics sales were up 19% to $2.6 billion driven by a 14% increase in prices and a 5% rise in volumes. The segment benefited from higher polyethylene demand, especially in the packaging markets. Volume growth was more pronounced in Latin America where production disruptions impacted sales in the previous quarter. The segment’s adjusted EBITDA of $729 million was up 24% from $590 million in the year-ago period.

Basic Chemicals: Sales in the segment went up 33% to $757 million on a 20% rise in prices and a 13% increase in volumes. The segment saw higher volumes in the Chlor-Alkali/Chlor-Vinyl business, especially for caustic and vinyl chloride monomer on the back of a recovering alumina and the pulp and paper industries.

Demand was particularly high in export markets. Caustic soda prices continued to improve sequentially. EBITDA for the quarter was $181 million, versus an adjusted income of $8 million in the year-ago period.

Balance Sheet View

Dow with its recent focus on debt reduction recorded total leverage of $19.7 billion as of September 30, 2010. Of this about $2 billion debt would mature in the near-term. Comparatively, cash and cash equivalent amounted to $3.2 billion. Net debt-to-capital declined to 44% from 46.5% in the second quarter and 49% in the first quarter.

Outlook

There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. The US and European markets have also started showing signs of improvement. Dow is also optimistic on major consumer-markets, including electronics, coatings, automotive and packaging. However, construction markets are expected to remain weak.

Currently, DOW has a short-term (1 to 3 months) Zacks #3 Rank (Hold).

 
DOW CHEMICAL (DOW): Free Stock Analysis Report
 
Zacks Investment Research